BLS Holdco, LLC v. Kushner Cos., LLC

BLS Holdco, LLC v Kushner Cos., LLC
2024 NY Slip Op 30382(U)
February 1, 2024
Supreme Court, New York County
Docket Number: Index No. 652944/2023
Judge: Lyle E. Frank
Cases posted with a "30000" identifier, i.e., 2013 NY Slip
Op 30001(U), are republished from various New York
State and local government sources, including the New
York State Unified Court System's eCourts Service.
This opinion is uncorrected and not selected for official
publication.
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SUPREME COURT OF THE STATE OF NEW YORK
NEW YORK COUNTY
PRESENT: HON. LYLE E. FRANK PART 11M
Justice
----------------------------------------------------------------- ----------------X INDEX NO. 652944/2023
BLS HOLDCO, LLC,
MOTION DATE 10/06/2023
Plaintiff,
MOTION SEQ. NO. 001
- V -

KUSHNER COMPANIES, LLC, LAURENT MORALI DECISION + ORDER ON
MOTION
Defendant.
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The following e-filed documents, listed by NYSCEF document number (Motion 001) 8, 9, 10,
11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21
were read on this motion to/for DISMISS

Background

This action arises out of a dispute involving a 2014 real estate investment transaction.

PlaintiffBLS HOLDCO, LLC ("Plaintiff') is a Delaware limited liability company, and a

member of nonparty BLS ASSOCIATES LLC, also a Delaware limited liability company.

Defendant Kushner ("Defendant Kushner") is a real estate investment firm, incorporated in

Delaware, with its principal place of business at 767 Fifth Avenue New York, NY. Defendant

Laurent Morali ("Defendant Morali") is an individual and senior management of Kushner.

Plaintiff alleges that in October 2013, the parties began discussions about a potential joint

venture acquisition of a group of residential properties owned by Brooklyn Law School. Three of

the properties, 27 Monroe Place, 38 Monroe Place and 100 Pierrepont Street were vacant

townhouses that were to be converted into single-family townhouses and then sold. The three

remaining properties were multifamily buildings located at 89 Hicks Street, 18 Sidney Place and

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144 Willow Street which were to be renovated and then rented at market rates. Plaintiff alleges

on around March 2014, Defendants sent a final business plan to potential investors, including

Plaintiff, seeking their investment in the acquisition of the six properties. To facilitate the joint

venture, the parties created BLS Associates LLC, whose members include Plaintiff, a Delaware

LLC, and nonparty K-BLS Portfolio, a Delaware LLC. The operating agreement defines K-BLS

Portfolio as a subsidiary of Kushner. To fund the acquisition of these properties and the costs of

initial renovations, BLS Associates obtained a $36.5 million credit facility. In addition, BLS

Associates' members invested approximately $12.6 million in equity, with approximately $9.3

million or 73%, of the investment from Plaintiff.

The first of the three Townhouses was sold in May 2017 for $12.9 million and the other

two Townhouses sold in 2021 for $7.65 million and $6.425 million, respectively. Plaintiff

alleges that in 2016, prior to the sale of the first townhouse major problems had arisen one of the

townhouses due to poor workmanship by the general contractor and poor oversight by

Defendant. Plaintiff contends that Defendant then informed Plaintiff there was a need to secure

extra funds to fix the problems. Plaintiff further alleges that despite attempts to obtain

information from Defendant, Defendant failed to provide correct information to Plaintiff and

made false assertions regarding Plaintiff's investment. Plaintiff alleges Defendant Kushner added

an additional $3.2 million dollar debt into the deal without plaintiff's knowledge or consent.

Plaintiff further alleges that Defendant Kushner failed to account for a loan repayment when

reporting on its loan for the Townhouse renovations which caused Defendant to receive

overpayments in excess of $650,000.

Plaintiff further alleges that Defendant Kushner expressly represented to Plaintiff that

only seven of the 77 units in the Multifamily Properties were rent stabilized but that the

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remaining 70 units could be rented at market rates. Plaintiff alleges it was only several years

later, after it had already invested in the project, that it found out all the 77 units were subject to

rent-stabilization. In August 2017, the tenants of one of the multifamily homes filed a putative

class action alleging that Defendant improperly deregulated their units in violation of rent

stabilization laws. Plaintiff alleges that it found out about the lawsuit not through defendant but

through the media, and when it confronted Defendants, they claimed the lawsuit was frivolous.

On April 19, 2022, Plaintiff alleges a representative of Defendant Kushner forwarded an internal

email to plaintiff which stated that Kushner had not followed necessary procedures to register the

units upon acquisition of the Multifamily Properties.

Plaintiff alleges that as a result of Defendant's conduct, the parties' joint venture was a

failure, causing Plaintiff to suffer significant economic loss. Thus, plaintiff commenced this suit

against Defendants asserting claims for breach of fiduciary duty, unjust enrichment, accounting,

and aiding and abetting breach of fiduciary duty against Defendant Morali. Defendants now

move to dismiss plaintiff's complaint on the basis that Plaintiff's claims are time barred pursuant

to Delaware's applicable statute of limitations and further as Plaintiff has failed to plead each

cause of action.

Standard of Review

Plaintiff moves to dismiss the complaint pursuant to both CPLR 321 l(a)(5) and (a)(7). It

is well-settled that on a motion to dismiss for failure to state a cause of action pursuant to CPLR

321 l(a)(7), the pleading is to be liberally construed, accepting all the facts as alleged in the

pleading to be true and giving the plaintiff the benefit of every possible inference. (See Avgush v

Town of Yorktown, 303 AD2d 340, 755 N.Y.S.2d 647 [2d Dept 2003]; Bernberg v Health Mgmt.

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Sys., 303 AD.2d 348, 756 N.Y.S.2d 96 [2d Dept 2003]). "The test on a motion to dismiss for

insufficiency of the pleadings is not whether the plaintiff has artfully drafted the complaint but

whether, deeming the complaint to allege whatever can be reasonably implied from its

statements, a cause of action can be sustained." (Pepler v Coyne, 33 AD3d 434,435, 822

N.Y.S.2d 516 [1st Dept 2006], citing Stendig, Inc. v Thom Rock Realty Co., 163 AD2d 46, 48,

558 N.Y.S.2d 917 [1st Dept 1990]).

Discussion

I. Statute of Limitations

Primarily, Defendants contend Plaintiffs claims are untimely pursuant to CPLR 202,

New York's "borrowing statute." Defendants argue under CPLR 202, plaintiffs claims are

subject Delaware's relevant statute of limitations as Plaintiff is a non-resident incorporated in

Delaware. In opposition, Plaintiff contends it was New York resident at the time its claims

accrued, and therefore pursuant to CPLR 202, New York's relevant statute of limitations must

govern.

Under CPLR 202, when a nonresident sues on a cause of action accruing outside New

York, the cause of action must be timely under both New York's applicable statute of limitation

and that of the jurisdiction where the cause of action accrued. ( Glob. Fin. Corp. v. Triarc Corp.,

93 N.Y.2d 525, 715 N.E.2d 482 [1999]). When another state's statute oflimitations is

"borrowed" pursuant to CPLR 202, the Court must enforce the shorter period of the two.

(Freedom Tr. 2011-2 v. HSBC Bank USA, NA., 214 A.D.3d 404, 184 N.Y.S.3d 340 [1st Dept

2023 ]). When an alleged injury is purely economic, the place of injury usually is where the

plaintiff resides and sustains the economic impact of the loss and a partnership's legal residence

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is where it maintains its principal place of business. (See Proforma Partners, LP v. Skadden Arps

Slate Meagher & Flom, LLP, 280 A.D.2d 303, 720 N.Y.S.2d 139 [1st Dept 2001]). Thus,

whether the Court will apply the applicable Delaware or New York statute of limitations, hinges

on whether as a matter oflaw, Plaintiff is deemed a resident of New York. The burden of

proving residency is upon the party seeking to take advantage of the New York statute."

(Interventure 77 Hudson LLC v. Falcon Real Est. Inv. Co., 172 A.D.3d 481,482 [1st Dep't

2019]).

New York Courts have repeatedly held that for purposes of CPLR 202, a Plaintiff is a

"resident" of, and its cause of action accrues in the state of its incorporation. ( Verizon

Directories Corp. v. Continuum Health Partners, Inc., 74 A.D.3d 416, 902 N.Y.S.2d 343 [1st

Dept 2010]; Interventure 77 Hudson LLC v. Falcon Real Est. Inv. Co., 172 A.D.3d 481,482 [1st

Dep't 2019]). In Global Fin. Corp, the Court of Appeals rejected a plaintiffs argument that it

should apply the New York Statute of Limitations applies because its claims accrued in New

York, where the contract was negotiated, executed, substantially performed, and

breached. (Glob. Fin. Corp. v. Triarc Corp., 93 N.Y.2d 525, 715 N.E.2d 482 [1999]).

Here, Plaintiff contends it is a resident of New York State or at the very least there is a

question of fact as to Plaintiffs residency, rendering dismissal inappropriate. Plaintiff reasons it

is a resident of New York because the economic injury it alleges it suffered is related entirely to

its investment in, and losses on, properties located in New York and Defendant's actions which

occurred in New York. The Court disagrees.

While on a motion to dismiss the Court will afford Plaintiff all favorable inferences, here

Plaintiff has made no indication that its principal place of business is located in New York. The

cases Plaintiffs point to do not demonstrate otherwise. In Oxbow, the First Department found that

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plaintiffs primary residence was a factual issue that could not be determined on a motion to

dismiss. (Oxbow Calcining USA Inc. v. Am. Indus. Partners, 96 A.D.3d 646, 948 N.Y.S.2d 24

[1st Dep't 2012]). However, there, plaintiff alleged that while its offices were currently in

Florida, at the time the cause of action accrued its principal place of business was located at an

office building in Manhattan. Here, there is so such issue of fact. Moreover, in Verizon, the First

Department rejecedt plaintiffs contention that, for purposes of the statute, it is a "resident" of

New York, or that its cause of action accrued in this state, by virtue of its authorization to do

business and asserted extensive presence here. (Verizon, A.D.3d). Here, plaintiff similarly

conflates business activities with an established New York principal place of business.

Therefore, the Court finds that pursuant to CPLR 202, as Plaintiff is a non-resident incorporated

in Delaware, the Court will apply Delaware's applicable statute of limitations.

II. First Cause of Action for Breach of Fiduciary Duty

Defendant argues that as Plaintiffs allegations stem from Defendant's alleged conduct in

2013 and 2014 when the parties entered into the venture and Plaintiffs lawsuit was filed in

August 2023, the claims are clearly time barred pursuant to Delaware's three-year statute of

limitations. Plaintiff argues that although Defendant's initial misconduct began in 2013 and

2014, due to Defendant's fraud, Plaintiff was not aware of the misconduct until later, tolling the

statute of limitations until that time.

Under Delaware law, the statute of limitations for breach of fiduciary duty, aiding and

abetting breach of fiduciary duty, and unjust enrichment is three years. 10 Del. C. § 8106. Under

Delaware law, the cause of action accrues "at the moment of the alleged harmful act." (Am. Int 'l

Grp., Inc. v. Greenberg, 965 A.2d 763, 811-12 [Del. Ch. 2009]; Jepsco, Ltd. v. B.F. Rich Co.,

No. CIV.A. 7343-VCP, 2013 WL 593664 [Del. Ch. Feb. 14, 2013]). This is true even if the

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plaintiff is unaware of the cause of action or the harm. (See In re Tyson Foods, Inc. Consol.

S'holder Litig., 919 A.2d 563,584 [Del. Ch. 2007]; Isaacson, Stolper & Co. v. Artisans' Sav.

Bank, 330 A.2d 130 [Del. 1974]). However, under the doctrine of fraudulent concealment, the

statute of limitations may be tolled if there was an affirmative act of concealment or some

misrepresentation that was intended to 'put a plaintiff off the trial of inquiry' until such time as

the plaintiff is put on inquiry notice. (In re Nine Sys. Corp. S'holders Litig., No. CV 3940-VCN,

2013 WL 4013306 [Del. Ch. July 31, 2013]). The statute oflimitations begins to run when

plaintiffs should have discovered the general fraudulent scheme but is tolled until such time that

persons of ordinary intelligence and prudence would have facts sufficient to put them on inquiry

which, if pursued, would lead to the discovery of the injury. Id.

Here, Plaintiff argues that although the fraudulent representations were initially made in

2014, 2016 and 2019, Plaintiff could not have discovered them until April 2022, due to the

defendant's fraudulent concealment. Plaintiff alleges that as late as 2018 Defendants were

making false claims as to when they learned about the rent stabilization laws went into effect and

their impact on the investment. Therefore, the Court finds with respect to plaintiffs claims

stemming from allegations that defendant breached its fiduciary duty in mispresenting the rent

stabilization subject, Defendant has failed to establish that Plaintiffs' claims are time barred as a

matter oflaw. Plaintiff alleges defendant fraudulently concealed such conduct until April 2022

when plaintiff was forwarded an email by defendant which stated that Kushner had not followed

necessary procedures to register the units upon acquisition of the Multifamily Properties.

Although Plaintiff concedes it learned about the 2017 lawsuit through the media, it alleges that

defendant consistently referred to the lawsuits by using terms such as "run-of-the-mill,"

"punitive," and "politically motivated," and claims Mr. Morali personally provided assurances

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upon which Plaintiff relied on. Providing Plaintiff with all favorable inferences, this fraudulent

concealment would toll the statute of limitations until April 2022

However, with respect to Plaintiffs allegations surrounding the townhouses, the Court

finds Plaintiffs claims are time barred. First, Plaintiff alleges the 27 Monroe Townhouse was

sold for significantly less than it was supposed to, however this sale occurred in 2017. Plaintiff

has not made a sufficient allegation that this was fraudulently concealed, and as such to the

extent that Plaintiffs claim is based on this sale, it is time barred. Next, plaintiffs allegations

that during the time of these renovations in there was mismanagement of the renovation process,

is again outside of the three-year statute of limitations and thus time barred. However, Plaintiff

has alleged that Defendant concealed its repayment of a loan to itself, and Plaintiff did not

become aware of this until 2021 as it was in Defendant's control. Therefore, this claim is

sustained at this stage in the litigation.

Next, Defendant argues that regardless of the statute oflimitations, Plaintiffs claim for

fiduciary duty must be dismissed on the basis that Defendant owed no duty to Plaintiff.

Defendant argues that the manager of BLS Associates is nonparty BLS Manager, and that is who

owed plaintiff a fiduciary duty, not Defendant. In opposition, Plaintiff argues Defendant owed

Plaintiff a fiduciary duty not as the named manager, but by way of its control over BLS

Associates. Defendant further argues Plaintiff is attempting to improperly pierce the corporate

veil.

While Defendant is correct that under Delaware law only managing members or

controllers owe fiduciary duties by default in LLCs, Defendant incorrectly reasons this

conclusively proves Defendant owed Plaintiff no duty. (Beach to Bay Real Est. Ctr. LLC v.

Beach to Bay Realtors Inc., No. CV 10007-VCG, 2017 WL 2928033 [Del. Ch. July 10, 2017]).

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Here, plaintiff has alleged adequate facts to demonstrate that while Defendant was not the

manager, Defendant exercised extensive control over the LLC.

Moreover, the cases Defendant points to are each distinguishable from the case at bar. In

Beach, the Court found the plaintiff had failed to adequately plead breach of contract against the

defendants as plaintiff merely alleged "defendant was a managing member and thus owed

plaintiff a fiduciary duty." (Beach 2017 WL 2928033). Here, Plaintiff has made a number of

specific allegations regarding the Defendants control and power over BLS Associates, including

that Defendant Kushner was in sole control of numerous loan and purchase/sale transactions and

other business activities, and exercised control over BLS Associates' assets and members'

capital accounts. In addition, Plaintiff has alleged Defendant Kushner consistently held itself out

as the entity with control and management responsibilities, sent correspondence to investors on

their individual letterhead, signed agreements on behalf of borrower LLCs and appeared to

expressly acknowledge the existence of a fiduciary relationship between Kushner and investors

in the managed properties.

Moreover, in REM, the Court held there was no fiduciary duty owed by defendant

because it was neither a manager or a controller and the LLC agreement "did not impose any

additional, non-default fiduciary duties on REM OA." (See REM OA Holdings, LLC v. Northern

Gold Holdings, LLC, Not Reported in Atl. Rptr. [Del.Ch., 2023]). Here, Defendant has not met

its burden for the purposes of a motion to dismiss, to conclusively show it was not a controller.

Again, in Stone, the Court found plaintiffs pleading failed to show defendant owed a fiduciary

duty as it merely said, "practically exercising board-level control" over the Company. The Court

found this allegation is conclusory and contradictory to other claims where plaintiff admitted

having sole control. (Stone & Paper Investors, LLC v. Blanch, Not Reported in Atl. Rptr.

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[Del.Ch., 2020]). Again, this is not the case here. Plaintiff has made specific non conclusory

allegations that if found true, demonstrate Defendant's controller capacity.

While both parties cite to substantive Delaware law on this issue, the Court notes that the

outcome is aligned under New York law as well. A fiduciary relationship arises "between two

persons when one of them is under a duty to act for or to give advice for the benefit of another

upon matters within the scope of the relation." Put differently, a fiduciary relation exists when

confidence is reposed on one side and there is resulting superiority and influence on the other"

Ascertaining the existence of a fiduciary relationship "inevitably requires a fact-specific inquiry."

(Roni LLC v. Arfa, 18 N.Y.3d 846, 848 [2011] [internal quotation marks and citation omitted]).

Therefore, under New York law, there is at least a question of fact as to whether there was a

fiduciary relationship between the parties.

III. Second Cause of Action for Unjust Enrichment

Next, Defendant asserts Plaintiffs unjust enrichment claim should be dismissed as it is

duplicative of its breach of fiduciary duty claim. In opposition, Plaintiff contends that unlike like

its breach of fiduciary duty claim, the basis for its unjust enrichment claim is the Defendant's

specific overpayments to itself in the course of the deal, where the breach of fiduciary duty claim

goes beyond this.

Under Delaware law, unjust enrichment is the "unjust retention of a benefit to the loss of

another, or the retention of money or property of another against the fundamental principles of

justice or equity and good conscience." The elements of unjust enrichment are (i) an enrichment,

(ii) an impoverishment, (iii) a relation between the enrichment and impoverishment, (iv) the

absence of justification, and (v) the absence of a remedy provided by law. Courts developed

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unjust enrichment as a theory of recovery to remedy the absence of a formal contract. (Stone

2020 WL 3496694).

Here, the Court finds that Plaintiff has alleged sufficient facts to meet the elements of an

unjust enrichment claim. Plaintiff alleges that during the joint venture between the parties,

Defendant Kushner, as the party spearheading the investment and coordinating funding for the

project, unjustly enriched itself with funds that should have been distributed to Plaintiff. While

some of these allegations form the basis for Plaintiff's breach of fiduciary duty claim, this does

not prevent Plaintiff from pleading unjust enrichment as an alternative theory of liability per se.

Thus, based on the allegations in the Complaint and reasonable inferences drawn from them,

Plaintiff has alleged sufficient facts which would constitute unjust enrichment.

Similarly, the elements of an unjust enrichment claim in New York are that (1) the other

party was enriched, (2) at that party's expense, and (3) that it is against equity and good

conscience to permit [the other party] to retain what is sought to be recovered. (See Mandarin

Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 182, 944 N.E.2d 1104, 1110 [2010]). For the

reasons set forth above, Plaintiff has adequately plead a claim for unjust enrichment under New

York Law. However, as explained previously, not all of Plaintiff's allegations survive the statute

of limitations threshold. Therefore, Plaintiff's unjust enrichment claim survives only to the extent

that the allegations occurred within Delaware's three-year statute of limitations, as prescribed

above.

IV. Accounting

Next, Defendants assert Plaintiffs accounting must be dismissed as Delaware law does

not provide a free-standing independent cause of action for an accounting but rather "' an

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accounting is an equitable remedy that consists of the adjustment of accounts between parties

and a rendering of a judgment for the amount ascertained to be due to either as a result."' (See

Garza v. Citigroup Inc., 192 F. Supp. 3d 508,511 [D. Del. 2018]). Plaintiff concedes that under

Delaware law, a claim for an accounting is a remedy and not an independent cause of action.

However, Plaintiff argues that here it has stated one or more predicate claims. Thus, as the court

has found Plaintiff has adequately plead a cause of action for breach of fiduciary duty and unjust

enrichment, its claim for accounting is proper.

V. Third Cause of Action for Aiding and Abetting Breach of Fiduciary Duty

Lastly, Defendants move to dismiss Plaintiffs claim for aiding and abetting breach of

fiduciary duty against Mr. Morelli. Defendant alleges Plaintiff does not belong as a Defendant in

this lawsuit as the complaint "makes only passing references to him and does not begin to

explain how he knowingly aided and abetted any breach of fiduciary duty." Furthermore,

Defendant contends, the Complaint is devoid of allegations of knowing participation. In

response, Plaintiff asserts that its allegations that Mr. Morali withheld information and made

misrepresentations, pushed for the repayment of loans to the detriment of plaintiff, and

personally assured plaintiff that defendant did not face significant exposure from the putative

class actions.

The elements of a claim for aiding and abetting a breach of fiduciary duty are: ( 1) the

existence of a fiduciary relationship, (2) a breach of the fiduciary's duty, (3) knowing

participation in that breach by the defendants, and (4) damages proximately caused by the

breach. (Stone & Paper Invs., LLC v. Blanch, CA. No. 2018-0394-PAF, 2020 WL 3496694 [Del.

Ch. June 29, 2020]). Here, as the Court has explained above, Plaintiffs claim for breach of

fiduciary duty withstands at this stage in the litigation. Thus, the determinative issue here is

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whether Plaintiff has adequately plead defendant Morali' s known participation in that breach.

The Court finds that plaintiff has made such adequate allegations. Granting Plaintiff with all

favorable inferences, there is sufficient allegations to substantiate a claim that defendant Moralli,

as a conduit and representative of Defendant Kushner, knowingly made misrepresentations to

plaintiff which negatively impacted their investment, such as the improper deregulation of the

multi-family buildings.

The foregoing constitutes the Decision and Order of the Court.

2/1/2024
DATE LYLE E. FRANK, J.S.C.

~
CHECK ONE: CASE DISPOSED NON-FINAL DISPOSITION

GRANTED □ DENIED GRANTED IN PART □ OTHER
APPLICATION: SETTLE ORDER SUBMIT ORDER

CHECK IF APPROPRIATE: INCLUDES TRANSFER/REASSIGN FIDUCIARY APPOINTMENT □ REFERENCE

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